In Mergers & Acquisition 2015 Roundtable experts from around the world gathered to discuss a broad range of topics. Partner and Head of M&A practice Dmytro Fedoruk shares his professional opinion on the following issues:
1) Can you talk us through the current M&A landscape in your jurisdiction?
The M&A activity in Ukraine remains practically dormant. Given the political instability, there is little interest from foreign investors in acquiring Ukrainian assets. Also some of those foreign investors who have previously acquired Ukrainian assets are looking to divest them. This scenario attracts Ukrainian buyers who try to benefit from the situation and often acquire such assets with very significant discounts. There is also a significant increase of M&A transactions related to distressed assets. It is expected that aggressive foreign buyers will likely follow the suit and try to enter the market with the purpose of acquiring undervalued assets in Ukraine but this has not yet become a massive trend.
2) Have there been any recent regulatory changes or interesting developments?
There has been some significant progress with legislative reforms and initiatives in Ukraine. However, we are yet to see how these reforms will be implemented in practice.
One of the recent developments is the requirement for all Ukrainian companies to disclose information regarding their ultimate beneficial owners. The law defines ultimate beneficial owners as individuals who, irrespective of formal ownership of Ukrainian company, may influence the management and business activities of the company. Information about UBOs is publicly available and may be easily accessed online.
There are also important developments in the area of transfer pricing. It has recently been clearly stated that transfer pricing rules do not apply to value added tax and transactions between related Ukrainian tax residents.
3) What are the key risk areas in an M&A transaction, and what common mistakes do companies make during a transaction?
The key risk areas are as follows:
- inadequate due diligence by the buyer and, as a result, acquisitions of unwanted liabilities the buyer did not know about;
- relying on warranties/indemnities provided by an offshore company with no substance which acts as a seller. In this case these must be supplemented by a parent company guarantee or other adequate security;
- inadequate disclosure of information by the seller which results in a potential liability due to warranty/indemnity claims. Sellers often start working on preparing a disclosure schedule at the very end of the negotiation process. In addition, any delay with preparing a disclosure schedule can hold up or even frustrate the deal if the potential buyer sees the issues it was completely unaware of;
- inadequate representation of the parties. In an attempt to save of legal fees, Ukrainian business owners often prefer to use their existing in-house lawyers in order to negotiate a cross-border M&A deal. This may complicate and delay the process due to unfamiliarity of in-house lawyers with the concepts used in Western style transaction documents.
4) Can you outline any applicable anti-corruption legislation in your jurisdiction? What are the potential sanctions and how stringently have they been enforced?
Ukrainian anti-corruption legislation has improved significantly over the last year. A series of laws and regulations were adopted in addition to the core law “On Fundamentals of Preventing and Combating Corruption”. There are also specific provisions on the topic in the Criminal Code and the Code of Administrative Offences. Amended legislation provides for increased sanctions – for example, taking a bribe may be punished with imprisonment of up to 12 years and confiscation of property.
Also, the new government body was established – National Anti-Corruption Bureau of Ukraine. It is a law enforcement agency with broad authority, which is responsible for fighting corruption in Ukraine.
5) M&A typically involves a substantial amount of due diligence from the buyer. Given the current climate what aspects of due diligence should be focused on in relation to technology/intellectual property?
Due diligence in relation to technology/IP issues requires particular thoroughness and accuracy. Special attention should be paid to the documents confirming seller's ownership of technology/IP and previous underlying documents for IP rights acquisition. It may be also necessary to carry out the analysis of legal risks related to the use of copyright works or industrial property as these rights have complicated nature. A properly conducted due diligence will help to determine possible risks and commercial value of the transaction in order to avoid acquisition of worthless technology/IP.
In addition, this will help to avoid a situation where, after acquiring shares of a Ukrainian financial institution operating under a well-known name, a foreign buyer discovered that the name of that institution was registered as a trademark and was still owned by the previous shareholder – this situation illustrates very well the need for a detailed and highly professional due diligence.
6) What key trends do you expect to see over the coming year and in an ideal world what would you like to see implemented or changed?
We expect the M&A activities level to increase significantly once (a) there is more certainty regarding the conflict in the Eastern part of Ukraine and (b) Ukrainian government negotiates a deal with its creditors. Obviously there are other important factors such as structural reforms moving ahead, evidence of success in fighting corruption, etc.
Most economists agree that Ukrainian assets are currently significantly undervalued, and this is likely to result in a mini M&A boom once the fundamental risks stated above are addressed.